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SPY: Banks Could be Boss Again

The technology sector has some serious competition for supremacy in the S&P 500. Amid a lethargic performance for that sector and soaring shares of banks, brokers and insurance providers, financial services is nipping at tech's heels for the top sector weighting in the S&P 500.

Naysayers note that the last time financials were the biggest industry was in 2008, Bloomberg reported. Investors know how well that turned out. The SPDR S&P 500 (NYSE: SPY), the world's largest ETF, allocated 17.54 percent of its weight to tech as of the close of markets on July 26.

SPY's weight to financial services was 16.79 percent. In the S&P 500 itself, the allocations were 17.55 percent and 16.84 percent, according to State Street data.

While SPY's weight to financials has doubled since the dark days of the financial crisis in early 2009, it is almost surprising the sector has yet to pass tech this year. As expected, financials have been one of a few bright spots in second quarter earnings season. Tech not so much.

Year-to-date, the Financial Select Sector SPDR (NYSE: XLF) is the second-best performer among the nine sector SPDR ETFs, trailing only the Health Care Select Sector SPDR (NYSE: XLV). XLF is up 25.9 percent, roughly two and a half times the 10.6 percent gain offered by the Technology Select Sector SPDR (NYSE: XLK). Of the nine sector SPDRs, only the Materials Select Sector SPDR (NYSE: XLB) has been worse than XLK this year.

Three tech stocks – Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT) – are currently members of SPY's top-10 lineup. Just two financials are – Berkshire Hathaway (NYSE: BRK-B) and Wells Fargo (NYSE: WFC) – and those are SPY's ninth- and tenth-largest holdings, respectively.

History: Not All Bad
While the financial crisis is still fresh on investors' minds, U.S. stocks actually have impressive records when banks are the S&P 500's largest sector. That was the case in 2002, a rough year for U.S. stocks, but from that year through the end of 2007, SPY gained over 20 percent. In the late 1990s, financial firms grew to 18.8 percent of the index, according to Bloomberg, and that gave way to one of the great bull markets, and yes, a tech-induced bear market, in history.

Part of the reason for financials' resurgence is dividend growth. Banks were among the most egregious dividend cutters during the global credit crisis, but recovery in the sector has given way to dividend growth. Granted, that growth is coming off a low post-crisis basis, but soaring financial services dividends have helped dividend ETFs with ample exposure to the sector outperform payout funds that are light on bank stocks.

For example, over the past two years, the WisdomTree Total Dividend Fund (NYSE: DTD) is up 35.1 percent, a performance that trumps that largest U.S. dividend ETF. DTD has a 17.6 percent weight to financials, more than double that of the largest payout ETF.

Boding well for future dividend growth out of U.S. banks is the fact that Bank of America (NYSE: BAC) and Citigroup (NYSE: C), two members of SPY's top-20 lineup, have nowhere to go but up with their payouts. Both companies still pay dividends of just four cents a share per year. In third quarter of 2008, Bank of America paid a dividend of 64 cents a share.

Equal-Weight
In the Guggenheim S&P 500 Equal-Weight ETF (NYSE: RSP), a fund with a penchant for outpacing SPY, tech already takes a back seat to financials, though both are behind consumer discretionary for sector supremacy.

Financials account for 16.43 percent of RSP's weight, 237 basis points ahead of tech and just 21 basis points behind discretionary. That indicates financials could become the biggest sector weight in RSP before doing so in SPY. The wider difference between the two sectors and/or the lower allocation to tech might also explain why RSP has outpaced SPY by 230 basis points this year.